Support/Resistance vs. Demand/Supply

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Online Trading Academy graduates know the importance of reading price. They also center their trading decisions on trend and supply and demand. Many people who hear those terms from us for the first time mistakenly believe that they are just clever terms we made up for marketing purposes.

The stark reality of trading is that the large institutional traders still take the lion’s share of profits in the markets. The retail trader or investor struggles to devise ways to make meager profits in comparison. Traditional technical analysis is usually taught by academics or by retail traders with little or no institutional experience. The majority of Online Trading Academy’s faculty has a background in trading on the floors of exchanges, institutional trading, or hedge fund trading. This means that when you take a course with us, you are learning tactics and strategies that have been proven to profit for those large, profitable institutional trading establishments.

Let’s examine the difference between those terms support/resistance and demand/supply. Traditional technical analysis defines support as a price level where price has a difficulty dropping below. Below is the definition from www.investopedia.com.

Support (Support Level): The price level which, historically, a stock has had difficulty falling below. It is thought of as the level at which a lot of buyers tend to enter the stock. Often referred to as the “support level”.

Investopedia explains “Support (Support Level)’ – If the price of a stock falls towards a support level it is a test for the stock: the support will either be reconfirmed or wiped out. It will be reconfirmed if a lot of buyers move into the stock, causing it to rise nad move away from the support level. It will be wiped out if buyers will not enter the stock and the stock falls below the support.

We define demand as a price level where selling pressure disappeared and the imbalance of buying pressure pushed prices higher as buyers had to raise prices higher to find sellers. Since the prices moved so far upward in such a short time, there are latent orders (unfilled buying orders) still sitting at the demand level that will push prices higher should they return to the level. Demand zones focus on where the institutions pushed the prices higher. We teach students how to properly identify that in our classes.

There are other major differences in the way we identify the levels. Note in the above example how there is only one line. Traditional analysis also teaches that the more times the level is touched, the stronger it will become. Neither of these will work over time in real life.

Every time a level is tested, more buying pressure is absorbed by the markets, thus it is weakened. You have higher risk by trading subsequent tests of demand. Also, trying to predict the exact level where price will turn is nearly impossible. With a demand zone, we are identifying an area where prices may turn. This increases our chances for success. Even in the above example, their support line was pierced. If I ask you to guess what number I am thinking of between 1 and 100, would you have a better chance guessing the exact number or a range of 10 numbers?

So learn the secrets of how the large players in the markets profit and mimic them. You will find that with practice it can lead to consistent profits and that is what we want in our accounts.

Brandon has appeared as a guest on CNBC Asia's Cash Flow and conducted special seminars for CNBC staff on technical analysis of the financial markets. He has also appeared as a guest commentator on Bloomberg Television.

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This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.

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